Why China’s once red-hot solar sector is cooling

In December 2021, a Zhejiang-based solar power plant company raised about 5.6 billion yuan ($884 million) in its Shanghai STAR Market listing, more than 10 times its target amount.

Hoymiles Power Electronics had planned to spend the proceeds on building power plants and upgrading equipment, according to its prospectus. But since its debut, the company has announced plans to use as much as 4.5 billion yuan of the windfall to buy financial products.

Hoymiles Power was just one of the Chinese solar energy companies that became an investor darling last year, as China worked to achieve its bold green ambitions. Two years ago, President Xi Jinping announced that China aimed to reach peak carbon dioxide emissions before 2030 and become carbon-neutral over the following three decades, helping the photovoltaic (PV) sector take off. The CSI Photovoltaic Industry Index — which tracks the shares of 50 major listed domestic solar energy companies — rocketed 45% from Jan. 4 to Dec. 30, reaching a total market value of 2.8 trillion yuan.

Over the past year and a half, capital from industries ranging from spirits, to finance, to real estate to the internet has been pouring into the new-energy sector, driving up the valuations of solar energy stocks, an investment bank analyst said.

As of the end of December, PV manufacturer Longi Green Energy Technology reached a market capitalization of 440 billion yuan, Trina Solar touched 160 billion yuan, and JA Solar Technology hit 150 billion yuan. All these stocks surged by four to eight times from their low point in 2020. Silicon supplier Tongwei also saw its market value jump fourfold to 200 billion yuan.

However, the industry looks set to come back down to earth. After expanding by a blistering 110% in 2021, the revenue growth of China’s PV industry will slow to around 40%, analysts from Citic Securities forecast in a research note published in December.

Government policy is one factor, but a more direct reason is that production capacity from the midstream of the industry on up has outstripped production of its main raw material, polysilicon, causing price rises down the industrial chain that now leave the profitability of new solar power plants in question.

Outrunning the supply

According to Lu Jingbiao, deputy director of the Silicon Industry of China Nonferrous Metals Industry Association, the blame for the soaring price of polysilicon lies with the rapid buildup of capacity in the middle stream of the industry.

“We have enough polysilicon to raise solar power capacity in 2021, but we don’t have enough polysilicon to satisfy the increasing capacity for silicon wafers and modules,” another source inside the module company agreed.

Polysilicon is used to make silicon wafers, which are combined to form PV cells. The cells comprise PV modules, also known as solar panels.

Just last year, wafer supplier Longi increased its production capacity by 24% to 105 gigawatts. Another giant of the business, Tianjin Zhonghuan Semiconductor, boosted its capacity by 56% in 2021 to 85 GW, and raised its 2023 target to 135 GW.

According to Lu, there were 580,000 tons of polysilicon available worldwide last year to produce 200 GW of PV modules, which could create 160 GW to 170 GW of installed capacity. However, now that silicon wafer manufacturers have expanded their capacity, they “are going to produce 400 GW, which is already twice the production capacity of polysilicon.”

Contracts between midstream producers and silicon suppliers usually set an annual volume for three to five years but allow for price changes monthly, Lu said. Therefore, more than 90% of the market’s silicon had already been booked in early 2021, leaving small or new producers scrambling to buy the remaining 10%, pushing up prices for everyone.

On the week of Dec. 22, polysilicon was selling for an average price of 236 yuan per kilogram, a 174% increase from prices earlier last year, according to market research institute PV InfoLink. The spot price of wafers also jumped 46% last year to reach an average price of 5.7 yuan apiece.

Those price increases do not bode well for downstream solar power plant operators. “The current cost makes nearly half of solar energy projects in China unprofitable,” said a source from a PV module company.

Pulling back

In 2021, China added 53 GW of installed solar power capacity, falling short of the China Photovoltaic Industry Association’s (CPIA) forecast for between 55 GW and 65 GW, figures from the National Energy Administration showed.

The lower-than-expected amount shows that downstream power plant operators are already feeling the surge in raw material prices, Qian Jing, vice president at New York-listed PV module provider JinkoSolar Holding, said at a CPIA meeting in mid-December.

Last year was already a hard one for solar power plants because it was the first year for China to set grid-parity prices for renewable power, which deprived producers of government subsidies and left them with smaller profit margins, a source from a state-owned electricity producer told Caixin. “If I know I am going to lose money, I’d rather halt my project,” the source added.

As demand slows, module suppliers tend to turn to price cuts. In November, Shanghai-listed Longi slashed its module prices by as much as 15%, followed by Shenzhen-listed Zhonghuan, which also lowered its product prices twice in a single month.

The price cuts by the two industry giants knocked the once-skyrocketing prices of silicon wafers down from 270,000 yuan per ton to 230,000 yuan per ton in December alone, a sign the industry may resort to deeper cuts in the future due to oversupply concerns.

With lower prices, “the world’s largest module manufacturer, Longi, will not only clean out its inventory, but can also squeeze out new competitors,” said Hu Dan, a senior analyst at U.K.-based market research specialist IHS Markit.

Last year, industry newcomers such as Shuangliang Eco-Energy Systems, Wuxi Shangji Automation, and Beijing Jingyutong Technology planned for combined production capacity of nearly 189 GW of wafers.

“When these newcomers finally start production, they may realize the business is not profitable anymore, even though they have already poured money into land and facilities,” said an unnamed senior brokerage analyst.

Clouds on the horizon

CPIA Deputy Secretary-General Liu Yiyang predicts the PV industry will undergo a “painful” reshuffle for five to 10 years, as it is expected to soon experience excessive supply problems.

The sector suffered a similar price war about 11 years ago, during which PV companies were able to expand their capacities, thanks to generous subsidies, but later ran into trade barriers that shrank the market. One of the world’s largest solar panel makers at that time, Suntech Power Holdings, ended up in bankruptcy restructuring due to its billions of yuan in debt.

Solar energy companies that managed to live through last year’s grid-parity price policy change have proved their profitability, further assuring the capital market that they are a good investment, the International Institute of Green Finance of the Central University of Finance and Economics in Beijing wrote in a research note published in October.

But it is unlikely the PV sector will have another bumper year like 2021 because all the policy incentives in the 14th Five-Year Plan, which covers 2021 to 2025, were released last year.

“In the long run, the solar energy sector will keep growing for sure, but individual companies may be subject to risk,” said Peng Peng, secretary-general of the China New Energy Assets Investment and Financing Platform.

Authors: ZHAO XUAN, MANYUN ZOU, NIKKEI Asia

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